Yen's Perfect Storm

The Yen's Perfect Storm escalated overnight amid the combination of
unexpected decline in Japanese unemployment and falling global equity futures
following the Dubai fallout. FX traders shall be eager to find out how Japanese
officials will follow up on their threats to stabilize their soaring currency
in the midst of the latest bout of global risk aversion, which was bound to
emerge considering equity indices' largely-dollar driven gains (see previous
notes on unsustainability of currency-driven stock rallies).

Chances of a successful yen-selling intervention (success = prolonging
yen weakness) would largely depend on officials' ability to stabilize falling
world bourses, rather than the volumes of actual yen selling. And thus, it
would be irresponsible to assume that yen-bound FX flows (new speculative
yen longs & unwinding of yen shorts) be halted at a time when risk appetite
has been violently shaken by a "new source of event risk" (Dubai fallout
rather than the usual suspects of weak US macro, US/UK banks or Eastern European
banks).

The yen signals were all here. Our warnings from Nov 10th "More Yen Gains
Ahead" were largely founded on the changing face of the carry trade, whereby
the US dollar had replaced the yen as the main funding currency to these
trades (courtesy of the Fed's dovish rhetoric), especially after US
dollar 3-month LIBOR fell below its JPY counterpart in August, for the first
time ever in August. The yen's diminishing role as a funding currency
was also a result of the Bank of Japan's announcement to end purchases of
corporate debt by year-end.

Japan Must Learn from US on How to Weaken its Currency Aside from threatening
at coordinated intervention action (central banks selling the yen), Japanese
officials can take a page from the Federal Reserve and resort to fresh liquidity
injections. One way would be for the Bank of Japan to reverse last month's
decision that it would halt purchasing corporate debt beyond year-end. Markets
must also be aware of the emerging rift between the Japanese Ministry of Finance
(new political power), criticizing the Bank of Japan (appointed & approved
by LDP) and the central bank's rosy forecasts. Thus, Japanese bureaucrats may
continue talking down the currency, but as long as the BoJ remains insistent
on gradually exiting its strategy of emergency liquidity measures & issuing
brighter economic outlook, yen downside would remain limited--especially if
the Dubai Debt fallout is accelerated in world bourse via year-end profit-taking.

Ashraf Laidi is Chief FX Strategist at CMC Markets and
author of "Currency Trading and Intermarket Analysis: How to Profit from
the Shifting Currents in Global Markets" Wiley Trading.

This publication is intended to be used for information
purposes only and does not constitute investment advice. CMC Markets (US) LLC
is registered as a Futures Commission Merchant with the Commodity Futures Trading
Commission and is a member of the National Futures Association.